5 Reasons to Keep Emergency Funds in an Online Savings Account

The most common answer you’ll find in print media (personal finance books) is a money market account.

There was a day and time when the money market interest rates outperformed bank savings accounts. But, that day is long past. Currently, top performing money markets are only earning around .20%. While some of the highest interest online bank savings accounts are just above or just below 1.30%.

Thus, there appears to be numerous advantages to keeping your emergency funds in an online bank savings account.

Why Keep Emergency Funds in a Bank Savings Account?

1. Interest Rates

Anywhere you look these days you’ll find crummy interest rates (at least in North America). You just need to decide if you want bad or worse. .20% is not good, nor is 1.30%, but 1.30% is better.

See what I mean? You have to choose between bad and worse. If you had an account at somewhere like Ally Bank (1.28% at time of writing) with $10,000, you would get $128 in interest for the year. If you had an account with a top money market account, you would get $20.

Since we don’t know when the interest rate advantage will switch back to money market funds, you might consider a switch to an online bank savings account.

2. Account Consolidation

Depending on how you bank and the structure of your investments, you may already have your emergency fund at an institution where you currently conduct business. I highly recommend that you try to simplify your finances by keeping everything in as few locations as possible.

In my case, I’m getting 1.10% when I could be getting 1.28% at Ally Bank. So why not make the switch? It’s not worth my effort for $18 per year, and I really like where I bank. I’d rather not add another bank to my portfolio when I’m perfectly happy with the service I get.

The convenience of having all your accounts in one place is appealing.

3. Liquidity

It is very important that you can access your money when have an emergency.

With money in my bank savings account, I can instantly access and send money fast.

I can instantly transfer the money to my checking account and use my checking account debit card to withdraw the money from an ATM.

I can instantly transfer the money to my checking account and send a check priority mail the next business day.

Yes, there are money market accounts that may give you both of these features, but if you have a money market account that doesn’t allow you these conveniences, this may be another incentive to switch.

4. Account Opening Promotions

Alright, I’ll tell you the truth, but I don’t necessarily recommend this. I like signing up for accounts just to get the bonus. The best way to get a return on your emergency funds is by surfing the balance from bank to bank just to take advantage of sign up bonuses. A few years ago, Citibank offered a $50 sign up bonus for accounts over $5,000. We split our emergency fund in two, and my wife and I both got an account. Everbank offered a sign up bonus worth up to 7,500 Priority Clubs points (but I didn’t like Everbank – more on that later). ING offered $25 to sign up for a savings account (and we’ve actually stayed with them for almost six years now).

If banks aren’t going to offer you a decent interest rate, then at least you can make your money grow by taking advantage of bank promotions.

At the end of the day, it is a fun little game to play, but it does little to impact your bottom line. It is probably not worth the effort unless you actually like the process.

5. FDIC Insured

Insurance for your emergency funds is important. Look for a bank that is FDIC insured (I have some samples below). FDIC insurance covers up to $250,000 at insured banks.

Where can I open an online savings account?

I can only give one direct personal suggestion from experience.

We’ve been with ING Direct for nearly six years, and I’m impressed with the competitive interest rates, excellent customer service, and fantastic features (like person to person payments and online check payments). If you want to get the ING Direct $25 sign up bonus, send me an email at mhforc [at] gmail [dot] com and I’ll get you a referral link where you can get $25 for signing up.

Personally, I wouldn’t recommend Everbank. Of the 20+ bank accounts I’ve had, working with Everbank has been the most frustrating. My biggest issue was trouble transferring money outside of my account. Too many glitches for me to suggest Everbank.

Online Banks with a Good Reputation

I’ve not personally used any of the following banks, but I’ve heard good reports about the following online banks.

Frequent talking points: 2% cash back on all non-PIN debt card purchases when your account balance is $5,000 or more at the start of the day (if less than $5,000, you get 1% cash back). Get up to 5% cash back in popular categories. PerkStreet announces the retailers and promotion periods for earning up to 5% cash back at Twitter or Facebook.

Comments

Have you looked at Checking Finder (https://www.checkingfinder.com), I’ve been keeping my emergency fund in a bank I found there and I am getting 3.5%. There are rules to follow but doing direct deposit, auto bill pay and using a debit card is stuff I do anyway.

Craig, this is a very thorough look at why you should keep your EF with an online bank. We had an account with ING, but we then switched to Emigrant Direct chasing after higher rates. I know that ING has subaccounts, and so we may go back to them – or use it for short-term, targeted savings.

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